U.S. President Donald Trump said on Thursday the United States would impose tariffs of 25 percent on steel imports and 10 percent on imported aluminum, starting next week. Rough Cut (no reporter narration).
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FILE - In a Sept. 22, 2005 file photo a steel worker measures steel coils of ThyssenKrupp steel company in Duisburg, western Germany. Ordering combative action on foreign trade, President Donald Trump has declared that the U.S. will impose steep tariffs on steel and aluminum imports, escalating tensions with China and other trading partners and raising the prospect of higher prices for American consumers and companies.(Photo: Frank Augstein, AP)

"This is just straight up stupid," Adam Posen, president of the Peterson Institution for International Economics, said Friday. "This is fundamentally incompetent, corrupt or misguided."

Posen, who served at the Federal Reserve Bank of New York in the mid-1990s, currently sits on the panel of economic advisers to the U.S. Congressional Budget Office.

The president's protectionist move, which would impose a 25% levy on all steel imports and 10% on aluminum, has garnered widespread criticism, with trade partners of the U.S. already threatening to retaliate. Downstream producers of steel and aluminum products — including car, plane and consumer goods manufacturers — say it will jack up their costs, and experts fear a trade war that could harm global growth.

US president of the Peterson Institute for International Economics Adam Posen delivers a speech May 27 during the ECB Forum on Central Banking in Sintra. The European Central Bank should raise its inflation target in order to boost the competitiveness of the eurozone economy, Nobel award winning economist Paul Krugman said.(Photo: Sergio Garcia AFP, Getty Images)

Rescuing US steel

"Steel is just a tiny input in the U.S. gross domestic product (GDP) — which is why it's so crazy. You mess up your entire trading system for an industry that has a total of 80,000 jobs," Posen argued. 2015 census data showed roughly 140,000 Americans employed in steel mills, contributing $36 billion to the national economy.

By comparison, steel-consuming industries, which experts believe will be hardest hit by the tariffs, employ 6.5 million Americans and add about $1 trillion to U.S. GDP, according to the census.

Trump, who campaigned on the promise of reviving long-suffering U.S. industries, argued the move will protect American jobs.

The U.S. imports 30% of its steel. Once a bastion of steel production, shifts in global trade and automation saw hundreds of thousands of steel jobs eviscerated from the 1970s onward. America's steel industry has long called for a clampdown on imports and global steelmaking overcapacity, and is now lauding Trump's decision.

U.S. steel and aluminum shares jumped sharply before markets closed Thursday, with some companies seeing share price increases of up to 9%.

Critics of the policy, which reportedly include Trump's own chief economic adviser Gary Cohn and Council of Economic Advisers chair Kevin Hassett, as well as multiple right-leaning free trade groups, warn that the protectionist measures will only hurt the U.S. in the long run.

But the move appears to be in line with what many people see as Trump's prioritization of pleasing his "base."

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The S&P 500 fell for a third straight day after President Donald Trump said the U.S. would slap tariffs on steel and aluminum. As Fred Katayama reports, that sparked fears of higher prices and a trade war.
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"It's time we stop pretending there was any sense at all," Posen said. "It's all about giving a handout to particular U.S. steel and aluminum producers. In national security terms, it makes no sense because it's hitting our military allies like western Europe, South Korea and Japan, and it doesn't directly hit China. It's a tax on consumers."

Posen noted that China isn't even among the top five steel exporters to the U.S. — these are Canada, Brazil, South Korea, Mexico and Russia.

The premise for the decision, known as Section 232, was on national security grounds. The White House claimed that relying on foreign steel could threaten the U.S. defense industry.

But even Secretary of Defense James Mattis said that the Pentagon "continues to be concerned about the negative impact on our key allies regarding the recommended options within the [Section 232] reports."

"The biggest thing is they think this is going to scare the Chinese," Posen said. "This isn't going to scare anybody. This is going to scare markets, but it's not going to scare the Chinese government, it's going to lead to retaliation possibly. And that's where things get bad."

A spokesperson for the White House was not immediately available for comment when contacted by CNBC.

A threat to global growth?

The economist wasn't immediately concerned about potential risks to inflation and fixed income markets, but stressed that "the bigger effect is on growth and uncertainty about real investment, and fears of an escalating trade war." And major financial players seem to agree.

Goldman Sachs said in a statement Friday that the tariffs "are likely to escalate trade tensions," particularly as the broad group of countries set to be impacted include U.S. allies. J.P. Morgan forecasted more macroeconomic risks if this were to initiate retaliatory action.

Japanese financial services firm MUFG called the issue "very important for the financial markets," warning that "if signs emerge of an escalation in trade tariff measures globally, it will prompt a dramatic deterioration in the current optimism over the outlook for global growth."